But a quick experiment Firecalc does not show a failure scenario from this period. Remember that big chunk of bonds you start out with that did extremely well provided a nice cushion. Bonds were yielding about 6% back then.

What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that. How would a 4% withdrawal rate work out then? (I wanted to use a number between 90% which has happened and 50% which has been common and likely to happen in the near future)

Let's run the numbers. We'll assume that bonds return 0% and no inflation adjustments just for simplicity.

At that point, the withdrawals are over 10% annually, and the portfolio is only returning 6.5% annually (per your specs). Without going further, I'm going to say that the likelihood of that portfolio being able to produce another $1M of withdrawals ($40k x 25 remaining years) is very low.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that.

6.5% returns after a 75% crash aren't "status quo". They represent a continuing decline. It is pretty easy to see why...

Imagine starting dividend yield is 2% (which is pretty low, all things considered) and you start with $100,000; you're getting $2,000 a year in dividends alone.

Now the share price crashes 75%. Your portfolio is only worth $25,000. A 6.5% return means a return of $1,625. But that's less than dividends pay out. Which means that the share price has continued to decline in order for total returns to be lower than the dividend yield.

The dividend return alone would be 8%. So you need to lose -1.5% from the price level to go down to a 6.5% total return.

edit to add: this dynamic is why dividend yield during the Great Depression went from ~3.5% to 13.8% in June 1932. It is (one reason) why there are usually high returns after a crash.

But a quick experiment Firecalc does not show a failure scenario from this period. Remember that big chunk of bonds you start out with that did extremely well provided a nice cushion. Bonds were yielding about 6% back then.

What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that. How would a 4% withdrawal rate work out then? (I wanted to use a number between 90% which has happened and 50% which has been common and likely to happen in the near future)

Let's run the numbers. We'll assume that bonds return 0% and no inflation adjustments just for simplicity.

At that point, the withdrawals are over 10% annually, and the portfolio is only returning 6.5% annually (per your specs). Without going further, I'm going to say that the likelihood of that portfolio being able to produce another $1M of withdrawals ($40k x 25 remaining years) is very low.

Hmm, thats very interesting. So when people say "4% withdrawal rate", what they really mean is they will withdraw a fixed $$ amount from the initial principle balance, and keep withdrawing the same dollar amount regardless of the principle. Learn something new every day!

I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that.

6.5% returns after a 75% crash aren't "status quo". They represent a continuing decline. It is pretty easy to see why...

Imagine starting dividend yield is 2% (which is pretty low, all things considered) and you start with $100,000; you're getting $2,000 a year in dividends alone.

Now the share price crashes 75%. Your portfolio is only worth $25,000. A 6.5% return means a return of $1,625. But that's less than dividends pay out. Which means that the share price has continued to decline in order for total returns to be lower than the dividend yield.

The dividend return alone would be 8%. So you need to lose -1.5% from the price level to go down to a 6.5% total return.

edit to add: this dynamic is why dividend yield during the Great Depression went from ~3.5% to 13.8% in June 1932. It is (one reason) why there are usually high returns after a crash.

Wow. So what you are stipulating is that, companies should be able to pay out a 2% dividend no matter what, even if they economy is in the toilet.. Wasn't there like a 35 year period after the Great Depression that it took for the S&P to return to its level before the crash? Thats a LONG time. I merely suggested a 5 year flat market then a 6.5% return thereafter.

I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that.

6.5% returns after a 75% crash aren't "status quo". They represent a continuing decline. It is pretty easy to see why...

Imagine starting dividend yield is 2% (which is pretty low, all things considered) and you start with $100,000; you're getting $2,000 a year in dividends alone.

Now the share price crashes 75%. Your portfolio is only worth $25,000. A 6.5% return means a return of $1,625. But that's less than dividends pay out. Which means that the share price has continued to decline in order for total returns to be lower than the dividend yield.

The dividend return alone would be 8%. So you need to lose -1.5% from the price level to go down to a 6.5% total return.

edit to add: this dynamic is why dividend yield during the Great Depression went from ~3.5% to 13.8% in June 1932. It is (one reason) why there are usually high returns after a crash.

It is a low starting dividend yield, and yet higher than today's dividend yield on US stocks. It's reasonable to ask a question assuming a lower initial dividend yield, which is how I interpret that question. You only need a starting dividend yield of 1.63% to make it a realistic question; current SEC yield on Vanguard TSM is 1.75%

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Wow. So what you are stipulating is that, companies should be able to pay out a 2% dividend no matter what, even if they economy is in the toilet..

No, I'm saying that it a well known that dividends are not as volatile as prices and you need to take both into account when thinking about total return.

Wasn't there like a 35 year period after the Great Depression that it took for the S&P to return to its level before the crash? Thats a LONG time. I merely suggested a 5 year flat market then a 6.5% return thereafter.

No, it didn't take 35 years.

So when did the overall stock market really make it back to its pre-crash peak? Just four years and five months after its mid-1932 low, according to data provided to Sunday Business by Ibbotson Associates, a division of Morningstar.

That seems remarkably fast, given that the stock market lost more than 80 percent of its value from its 1929 high to its mid-1932 low.

But the quick recovery of the 1930s is consistent with the typical experience after other bear markets in the United States.

DETERMINING the precise length of such recoveries is a problem, given the many definitions of a bear market. Whatever definition is used, however, the typical recovery time is quite quick.

In fact, according to a Hulbert Financial Digest study of down markets since 1900, the average recovery time is just over two years, when factors like inflation and dividends are taken into account. The longest was the recovery from the December 1974 low; it took more than eight years for the market to return to its previous peak, which was reached in late 1972.

I always assumed this was true, that a SPIA would be a great option. However, when I go to immediate annuities and price one out it seems like a CD/Tips ladder makes more sense. With current annuity rates, on average you will get back about what you paid in, before inflation. It only starts to beat a cd/tips ladder if you live considerably longer than average.

There are an army of people whose pay checks depend on convincing people to invest in ways that are against their self interest. This forum is the volunteer army that fights back!

I thought the 4% rule was calculated using actual historical market performance. I would certainly expect it to work for anyone who retired in 2000.

The biggest problem with the 4% rule is that it is planning for the worst case scenario regardless of reality. If every retiree does this we are collectively massively under-spending. Inheritances will balloon if this thinking catches on. It is like a cruise liner with one lifeboat for each person on board. We are guaranteed everyone has a life boat, but we are also guaranteed a lot of leftover unused lifeboats in most scenarios.

I thought the 4% rule was calculated using actual historical market performance. I would certainly expect it to work for anyone who retired in 2000.

The biggest problem with the 4% rule is that it is planning for the worst case scenario regardless of reality. If every retiree does this we are collectively massively under-spending. Inheritances will balloon if this thinking catches on. It is like a cruise liner with one lifeboat for each person on board. We are guaranteed everyone has a life boat, but we are also guaranteed a lot of leftover unused lifeboats in most scenarios.

30 years hasn't passed for a 2000 retiree yet.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

A constant, real terms withdrawal rate, 4% is IMHO very silly. You have to be an absolute idiot if you see your portfolio halved overnight and you insist on withdrawing the same amount as the previous year PLUS inflation! All sane BHs will withdraw less. The 4% rule is a useful theoretical construct to enable us to gauge WHEN we can afford, under reasonable conditions, to retire. Again, for myself I see a 5%-of-portfolio WR as far more reasonable to apply once we have retired. Market shoots up, you splurge; market tanks, you put a squeeze on your spending. And anyway a 5%-of-portfolio WR should under reasonable conditions last essentially forever as the median prediction of a Monte Carlo simulation AND your withdrawals (and of course the remaining portfolio) keeps up with inflation (100% stocks portfolio). Of course there is a 50% probability of under-shooting but also a 50% of experiencing a very rosy future indeed.

Now for a true history of a 1.1.2000 retiree. Myself. I retired with a COLA pension and a 7 figure 100% stocks portfolio. Never did cut back on my spending compared with my working days despite the pension being only 56% of my job income. Since then I have put 2 kids through college, donated a couple million $ (more than the cumulative pension I have collected so far), and my portfolio is now in 8 figures. 100% stocks works! All those contemplating retirement: Do not over-worry and try to cater for a 90% market collapse. Just be prepared to have your withdrawals follow market performance and you'll be fine. I never expected my NW to go up so substantially with all the gyrations we've had since 1.1.2000.

There's a link option in the display that you can use to link to specific choices such as I've done for these two links (for a form of Larry Portfolio but using stock/gold 50/50 barbell instead of bonds).

Note the 4% SWR i.e. 4% of original amount deducted at the start and then a inflation adjustment of that amount taken after a year ...etc. so that your income remains constant in inflation adjusted terms.

I think the message is that the "rule" should be a "guide". You don't want to amp up hard expenses (those not easily cut) close to the 4% guide so you leave little room for making spending adjustments when investments are tanking.

It seems likely that most people will know enough to cut back on some spending when they have to withdraw from a steep declining portfolio -- especially earlier in retirement.

Thanks for a helpful reminder that the 4% time is just what it says on the tin: a strategy that, given a balanced AA, has not yet resulted in running out of money during any historical 30 year period.

That doesn't mean that those who use it feel safe all the time, or that they might not benefit from tightening their belts a little during tight years. Nor does it consider whether people retiring in those years would actually have been able to implement a diversified low-cost portfolio. Nor is it a guarantee that the same withdrawal rate would work for 40 or 50 years for early retirees or the very long-lived.

But it has so far continued to be a good guideline for the retiree whose goal is simply to not outlive their money, and needs help figuring out what standard of living their nest egg can support.

You have shown that a 4% withdrawal looks to be successful for a retiree, circa 2000.
Now the question I have is what would have been SafeMax for the same time period? Is that knowable? Can it even be estimated?

1 Question: Would you have been able to do the same if
you didn't have a pension paying (only 56% of your job income)?
As you know pensions are going away (lucky for you that you received one).

If you removed the pension how would a 100% stock fund treat you
(including dividends)? That's the real question.

MSKs post made me laugh a little to be honest. It's easy to say you're going to "adjust your spending down" when you have a pension paying you 56% of your final salary, likely two social security checks, and a multimillion dollar portfolio. Perhaps in a big downturn you only go on 3 vacations that year instead of 4 or you skip appetizers when you go out to dinner. You might get a new C class Mercedes lease for $500/mo instead of an E class Mercedes for $700/mo. Maybe you don't make your regular $50,000+ annual charitable donation.

Many people are withdrawing 4% + inflation because they need that money to live. There are plenty of people who just make it to retirement and they need to now to maximize their withdrawals. "Adjusting spending down" might mean selling their longtime home or moving to a less expensive area where they know no one.

I would say year 2000 retirees have done pretty well considering the messes in between. Your 1mm portfolio has given you $905k of income over 18 years and has maintained it's original principal.

Last edited by Jags4186 on Tue Jan 09, 2018 8:29 am, edited 1 time in total.

The S&P went from 1500 to over 2700 in those 18 years. Along with dividends, isn't that a decent-enough return to support a retirement withdrawal program? And inflation has been very tame all this time.

+1

Those who move forward with a happy spirit will find that things always work out.

I cannot wrap my head around the 4% Trinity (guideline) of
selling off my portfolio & making it last 40, 50, 60 years & then
be able to pass down wealth to my children someday.

I think the 4% Trinity (guideline) might work for 30 years (?)
but after that the withdrawal get's really questionable. And,
the portfolio value is very questionable.

Do you have any (good) suggestions for my situation? Thanks...

Snarlyjack,

Are you currently in the position of living on 4% of your assets? If not I wouldn't worry about 77 year withdrawal periods. If so, you should consider what happens if you retire not in a "doomsday scenario". Take the most recent 40 year period beginning in 1978. If you were invest 60 US stocks 40 Int. Term Treasuries (no data on total bnd market) your $1mm would currently be worth $22mm and you would have withdrawn an inflation adjusted $158,000 in 2017... a mere 0.7% of the portfolio's value.

I would say the main thing to keep in mind is that any examination of what would have occurred if one "followed the 4% rule" is only meant to be an academic exercise to get a feel for what an approximate safe initial withdrawal rate is.

But as for actual methods that a retiree should follow, virtually every one that's out there is an improvement on the "4% rule" because just following the rule never takes into consideration how markets have performed and changing life expectancy. The operative term for the effectiveness of various retirement income withdrawal strategies is "withdrawal efficiency rating" and generally the "4% rule" is what all of the other methods are usually measured against, since they'll all be varying degrees of superior to the "4% rule".

I keep putting "4% rule" in parenthesis because that was never meant to actually be a retirement withdrawal strategy.

Funny...my point of view after reading this post is just the opposite.

I think 25X is not enough, but that is perhaps a matter of temperament. That said, the number of people who would stay the course without panic/misery after 2003 must be quite a bit less than 100%, and as he said if you didn't rebalance into stocks after that decline things are worse. Faith that the past scenarios cover the future is just that, faith. I think 4% is an OK starting point, but really you need some options to cut spending/go back to work etc if things go bad in the first few years. Or you need an almost religious faith in the 4% rule and a very stoic attitude...

The forward projections don't work if you assume 0% real return on bonds, and 3% on equities, going forward?

In other words, this is not as reassuring as one might think. Because from memory bonds were paying 4-5% yields in 2000? Yes it was a bad time for equities, but not for bonds. Bonds now? 0% real probably. Equities, maybe 3% real-- maybe.

Your only real best estimate of the SWR is to see what you get on an inflation adjusted annuity at age 65, right now.

Numbers I have for the UK are 3.1% (£3100 of income for £100k of initial premium). That has no spousal benefit whereas you'd have to factor in 50% spousal benefit.

The forward projections don't work if you assume 0% real return on bonds, and 3% on equities, going forward?

In other words, this is not as reassuring as one might think. Because from memory bonds were paying 4-5% yields in 2000? Yes it was a bad time for equities, but not for bonds. Bonds now? 0% real probably. Equities, maybe 3% real-- maybe.

Your only real best estimate of the SWR is to see what you get on an inflation adjusted annuity at age 65, right now.

Numbers I have for the UK are 3.1% (£3100 of income for £100k of initial premium). That has no spousal benefit whereas you'd have to factor in 50% spousal benefit.

That's your SWR right now.

3.1%

Do you not consider that 3.1% includes a profit for the insurance company?

There is always discussion regarding withdrawal rates and what is safe. Those who retired in the year 2000 have probably had the roughest road of any retirees in terms of market returns since the early 1970s. Let's take a look to see where they would be today, 18 years later, if they had used a 4% plus inflation withdrawal rate.

First, let's assume that they used a 60/40 portfolio, where half of their equities were in VTSMX (U.S. stocks) and half in VGTSX (international equities), and the bonds were in VBMFX (total U.S. bond market). Let's also assume that their starting portfolio was $1M. Their withdrawals occur at year end (first year withdrawal of $41,355 on 12/31/2000).

As of 12/31/2017, the inflation-adjusted value of the portfolio would have been $670,363. Their last year's withdrawal would have been $58,626. This means that they have about 11.4 years of withdrawals left, assuming a 0% real return going forward. So as long as these retirees get a small real return on their remaining portfolio, they shouldn't have a problem making it to the 30 year milestone typically used in safe withdrawal rate research.

What if they had gone with a more conservative portfolio like 40/60? Their portfolio would now be worth an inflation-adjusted $748,413.

What if they had gone exclusively with U.S. equities and had no international exposure (60 U.S. equities/40 U.S. bonds)? Their portfolio would now be worth an inflation-adjusted $702,401.

Anything could happen going forward, but it looks as though retirees who rigidly followed the '4% rule' will make it to the 30 year milestone. That being said, their portfolio would have dropped to an inflation-adjusted $532,570 in Feb., 2009. The portfolio recovered to $684,815 by the end of 2009, but it still would have been difficult to withdraw that year's spending of $49,965, 7.3% of the remaining portfolio, only 10 years into their retirement.

Your numbers are pessimistic. You double count inflation. If you are inflation adjusting withdrawals there’s no need to inflation adjust the portfolio balance. At the end of 2017 using your 30/30/40 portfolio you would have $982,518 after withdrawing $58,626 on 12/31/17.

Thanks, I actually had just noticed that. So the retiree would have 16.7 years of spending left, assuming 0% real return, assuring them of making it beyond 30 years.

That is a significant difference. It appears to me 4% even in the worst time to retire held up just fine. And it assumes 100% rigidity which many would not adhere to.

If you're 83, do you really need an inflation-adjusted SPIA? Realistically, you probably don't have more than another 10-15 years left, and that inflation-adjustment comes with a steep price tag when you can even find it.

I think a regular SPIA might be worthwhile to consider, as well as a TIPS ladder. I never think that equities should be completely off the table either.

Well in theory 10 years is enough for inflation to cut the value of your dollar by about half. As far as a steep price tag, it always seems to me like they are priced about right (i.e. you get a little less than a nominal spia for a normal life span, lot more if you live another 10 years. About what you would expect giving you are paying for inflation insurance). They just look horrible because the initial values are so low (4% versus 7%). Granted I have never seen one priced out for a 83 year old:)

The question is always if you live long enough to need the SPIA (versus just doing a bond ladder), are you going to be OK with nominal returns. Last 20 years have been low inflation so you were fine. 1966-1986 was another story. Today an 83 year old couple gets about 10% from a nominal SPIA. They could shove 600k of thier portfolio in and pretty much meet their current spending needs and take the remaining 300k+ and invest. Or they could could build a 12 year tips ladder (also about 700k) and invest the rest (i.e. moving to something like 30/70 portfolio)

The forward projections don't work if you assume 0% real return on bonds, and 3% on equities, going forward?

In other words, this is not as reassuring as one might think. Because from memory bonds were paying 4-5% yields in 2000? Yes it was a bad time for equities, but not for bonds. Bonds now? 0% real probably. Equities, maybe 3% real-- maybe.

Your only real best estimate of the SWR is to see what you get on an inflation adjusted annuity at age 65, right now.

Numbers I have for the UK are 3.1% (£3100 of income for £100k of initial premium). That has no spousal benefit whereas you'd have to factor in 50% spousal benefit.

That's your SWR right now.

3.1%

Joint US SPIAs for a 65 year old were paying just a smidge (I think it was 4.1%) earlier in the year. And to be really technically that is a more conservative number in that traditionally Bengens SWR are for 30 year periods while these inflation adjusted SPIAs are for eterntity (which in this case probably maxes out at 45 years for the .001%).

Getting 0% real from bonds and 3% from stocks is far from fatal for a 4% SWR especially if it is only for 10-15 years (i.e. most estimates). The exact way we get those returns starts to matter more than the absolute numbers. But to a large extent if you look at 2000-9 you are looking at ~-2% (real) for stocks and ~4% for bonds. And things have an excellent chance of working out

I tried to duplicate willthrill81's great, very stimulating analysis using the assumption of 100% in Vanguard Wellesley since that may be how I go in the future so that DW can have portfolio she does not need to deal with re-balancing, etc. I used data from Simba's Backtest workseet up to 2016.

Not sure I did the analysis correctly but if I did it looks even better than the 60/40 portfolio. What I get is that at end of 2016, a Wellesley portfolio would have been 2X the size of a 60/40 as in the OP's model.

willthrill81, any way you can look at what your analysis technique would say for a 100% Wellesley investment?

I tried to duplicate willthrill81's great, very stimulating analysis using the assumption of 100% in Vanguard Wellesley since that may be how I go in the future so that DW can have portfolio she does not need to deal with re-balancing, etc. I used data from Simba's Backtest workseet up to 2016.

Not sure I did the analysis correctly but if I did it looks even better than the 60/40 portfolio. What I get is that at end of 2016, a Wellesley portfolio would have been 2X the size of a 60/40 as in the OP's model.

willthrill81, any way you can look at what your analysis technique would say for a 100% Wellesley investment?

Jan. 1, 2000 - Dec. 31 2017 would have left you with $2,020,699. Your 4% inflation adjusted withdrawal would be $58,626 and that is 2.9% of the portfolio.

What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that.

6.5% returns after a 75% crash aren't "status quo". They represent a continuing decline. It is pretty easy to see why...

Imagine starting dividend yield is 2% (which is pretty low, all things considered) and you start with $100,000; you're getting $2,000 a year in dividends alone.

Now the share price crashes 75%. Your portfolio is only worth $25,000. A 6.5% return means a return of $1,625. But that's less than dividends pay out. Which means that the share price has continued to decline in order for total returns to be lower than the dividend yield.

The dividend return alone would be 8%. So you need to lose -1.5% from the price level to go down to a 6.5% total return.

edit to add: this dynamic is why dividend yield during the Great Depression went from ~3.5% to 13.8% in June 1932. It is (one reason) why there are usually high returns after a crash.

I would be pretty convinced (in the absence of other information) that dividend yields are a lot more volatile than they were, historically.

There is that collective memory when Conn Ed cut its dividend in the 1970s, and shareholders were weeping in the meeting.

Nowadays companies slash the dividend when they hit rough water. Figuring they can always make it up to shareholders (including their senior executives) by buybacks when things are going better-- buybacks benefit option holders, whereas dividends are bad for stock option holders.

It was a big thing when ICI, the doyen of British industry (chemicals) cut its dividend in the early 1990s recession. It was a ructure when BP abolished its dividend during Deepwater Horizon. Now, unless it was Royal Dutch Shell (40% of all dividends paid by UK FTSE All-Share companies), the market would blink, but that's all.

The forward projections don't work if you assume 0% real return on bonds, and 3% on equities, going forward?

In other words, this is not as reassuring as one might think. Because from memory bonds were paying 4-5% yields in 2000? Yes it was a bad time for equities, but not for bonds. Bonds now? 0% real probably. Equities, maybe 3% real-- maybe.

Your only real best estimate of the SWR is to see what you get on an inflation adjusted annuity at age 65, right now.

Numbers I have for the UK are 3.1% (£3100 of income for £100k of initial premium). That has no spousal benefit whereas you'd have to factor in 50% spousal benefit.

That's your SWR right now.

3.1%

Joint US SPIAs for a 65 year old were paying just a smidge (I think it was 4.1%) earlier in the year. And to be really technically that is a more conservative number in that traditionally Bengens SWR are for 30 year periods while these inflation adjusted SPIAs are for eterntity (which in this case probably maxes out at 45 years for the .001%).

But you have to plan for the maximum, not just the average.

4.1% CPI linked?

Getting 0% real from bonds and 3% from stocks is far from fatal for a 4% SWR especially if it is only for 10-15 years (i.e. most estimates). The exact way we get those returns starts to matter more than the absolute numbers. But to a large extent if you look at 2000-9 you are looking at ~-2% (real) for stocks and ~4% for bonds. And things have an excellent chance of working out

I'd have to see the numbers. To get to higher numbers, you'd have to have a crash-- that would mean future returns would be higher. However for our retiree, they have lost money in that crash, so they are not better off.

The forward projections don't work if you assume 0% real return on bonds, and 3% on equities, going forward?

In other words, this is not as reassuring as one might think. Because from memory bonds were paying 4-5% yields in 2000? Yes it was a bad time for equities, but not for bonds. Bonds now? 0% real probably. Equities, maybe 3% real-- maybe.

Your only real best estimate of the SWR is to see what you get on an inflation adjusted annuity at age 65, right now.

Numbers I have for the UK are 3.1% (£3100 of income for £100k of initial premium). That has no spousal benefit whereas you'd have to factor in 50% spousal benefit.

That's your SWR right now.

3.1%

Do you not consider that 3.1% includes a profit for the insurance company?

SPIAs are a highly competitive market.

I don't believe the insurance companies make more than ordinary economic profit on them. So that margin is not huge-- I doubt it's 10% return on capital (i.e. 3.4% gross return, 3.1% net).

You are accepting the credit risk of the insurer, and if the market is efficient you are getting paid for that. The trouble is a failure of a major insurer is sufficiently rare (Executive Life in California. AIG nearly failed) that it's hard to assess that.

To me, the issue now, for those of us approaching retirement is the prospect of lower-than-historic returns...at least for the immediate horizon. I know that none of us can predict, but the fact that Jack Bogle has cited this possibility has me running all of my calculators on a much-lower expectation. Beyond that the issue of course is real return (excess over inflation) and other issues like healthcare inflation and future taxes.

That's the thing -- it is always a possibility in any scenario. We may go down the toilet tomorrow and never recover. We may go higher all the time and never come down. Jack Bogle's prediction is just that -- a prediction with little weight behind it because no one has that kind of foresight. What we can do as the lizards we are is to incorporate the likeliness of scenarios into our financial holdings and figure out where enough lands from a reasonable point of view. This includes, but not limited to, medical emergencies, legal setbacks, boredom, raised taxes, and other mishaps in judgement. To some, this means that they will never stop working because there will be some calculator telling them that they don't have enough. At the other end, its when their basic expenses are met. I suspect that the remaining falls between the extremes using their own judgement as the ultimate decider of when to pull the trigger to retirement.

I tried to duplicate willthrill81's great, very stimulating analysis using the assumption of 100% in Vanguard Wellesley since that may be how I go in the future so that DW can have portfolio she does not need to deal with re-balancing, etc. I used data from Simba's Backtest workseet up to 2016.

Not sure I did the analysis correctly but if I did it looks even better than the 60/40 portfolio. What I get is that at end of 2016, a Wellesley portfolio would have been 2X the size of a 60/40 as in the OP's model.

willthrill81, any way you can look at what your analysis technique would say for a 100% Wellesley investment?

Jan. 1, 2000 - Dec. 31 2017 would have left you with $2,020,699. Your 4% inflation adjusted withdrawal would be $58,626 and that is 2.9% of the portfolio.

Thank you, Jags4186 ! Future very unlikely to mirror past but its comforting to know Wellesley would have worked well, none the less
Thanks again.

Great post.
This reinforces 4 things to me.
1. Keep SPIA's on the option table.
2. 25X is not enough, maybe not even close going forward.
3. Ability to adjust withdrawals is vital.
4. Explore alternate income streams.

j

How in the world is 25x not enough? This graph shows the exact opposite. Even using brain-dead following 4% rule to the letter, it still worked.

I agree with points 1 and 3.... maybe 4 (I know you're a real estate guy with rental income). But this thread shows that 25x is indeed a useful "rule of thumb".

Most of us have a lot of discretionary expenses built into our 4%. Most of us would take 2 vacations instead of 4 vacations during a 50% stock market crash or wait an extra year or two to buy a new car.

SPIA is always an option.

Look, you and many others here have 40x or 50x expenses because you weren't even paying attention. You loved your work, or you made a lot of money young that it was no great sacrifice to work an extra 5 years at age 50 to shoot past 25x expenses.

But plenty of people are approaching 25x expenses at a normal retirement age, and there's no reason for them to work an extra 5 years at age 60 or 65 because they've been scared that "4% is not even close".

Time is also a limited resource. No one wants to risk running out of money, but it sure seems a lot of people on these boards are willing to risk running out of time.

What this shows is that, yeah, a 4 % withdrawal rate, upped w inflation, works over 30 years. But you have to have a stomach of steel and be ok watching your nest egg get at least partially consumed. This argues for Bernstein’s more conservative 2-3%.

I found stats to say £88 billion in yearly dividends for FTSE 100. Looking at Shell's div yield of 5% and market value of £240 billion, that makes a £12 billion dividend out of £88 billion in FTSE 100 dividends. 13.5% looks a fairly accurate number. I'd say it would then make up an even smaller % of the FTSE All-Share dividend since the All-Share has more market cap than the FTSE 100. The UK indexes are still too top-heavy no doubt, but it gets a bit exaggerated sometimes.

But a quick experiment Firecalc does not show a failure scenario from this period. Remember that big chunk of bonds you start out with that did extremely well provided a nice cushion. Bonds were yielding about 6% back then.

What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that. How would a 4% withdrawal rate work out then? (I wanted to use a number between 90% which has happened and 50% which has been common and likely to happen in the near future)

75% crash is possible, but it's never been followed by a "status quo 6.5% return".

If it did happen, you'd better prepared to cut expenses (zero vacations instead of 4), or go back to work to earn a bit of money.

Having a Social Security and pension/SPIA floor would help a lot in such a situation.

What this shows is that, yeah, a 4 % withdrawal rate, upped w inflation, works over 30 years. But you have to have a stomach of steel and be ok watching your nest egg get at least partially consumed. This argues for Bernstein’s more conservative 2-3%.

Remember, this was the WORST time to retire in the past 30 years. And 4% worked.

All the other years, you did much better.

If you want to argue for 3% (or 3.5%), fine. But 2% should be completely eliminated from the conversation. That's just plain silly.

What this shows is that, yeah, a 4 % withdrawal rate, upped w inflation, works over 30 years. But you have to have a stomach of steel and be ok watching your nest egg get at least partially consumed. This argues for Bernstein’s more conservative 2-3%.

Remember, this was the WORST time to retire in the past 30 years. And 4% worked.

All the other years, you did much better.

If you want to argue for 3% (or 3.5%), fine. But 2% should be completely eliminated from the conversation. That's just plain silly.

Agreed. You’d be pretty silly to withdraw 2% if you retired in 1982...which would have supported a 10% withdrawal rate adjusted for inflation and leave you with your original principal after 30 years.

What this shows is that, yeah, a 4 % withdrawal rate, upped w inflation, works over 30 years. But you have to have a stomach of steel and be ok watching your nest egg get at least partially consumed. This argues for Bernstein’s more conservative 2-3%.

Your retired and have no income. Why should your nest egg not be consumed? Lack of consumation <sic> of the nest egg should not be a pre-requisite for a retirement strategy. Otherwise, SPIAs would be immediately disqualified (although, admittedly, the consumption creates a guaranteed income stream)

You might be alarmed at the *rate* of consumption. Fair enough. But it still does not change the fact that, for the worst (start of a) 30 year retirement in recent history, you are perfectly fine to retire with 25x cash flow requirements and be more than extremely confident that your spending power will last for at least 30 years.

Oh, and the *data* shows that even worse cases also passed.

2000 was a test case for a horrible sequence of returns, and it passes with flying colors. Folks that are advocating for 3% or less really are doing so irrationally, based on fear, afraid that the available data isnt' saying what it is. It's not a criticism: you only get one chance to be wrong, so you had better be sure. I get the conservatism. I really do. But make sure you're being conservative / fearful for the right reasons. This data, along with the rest of the trinity-like studies, have consistently showed that anything less than about 3.5% is really not justified by any available data. Especially since 3.3% is "guaranteed" via TIPS. 4% is NOT AVERAGE. It's worst case. Planning for the worst case is already being conservative.

You have shown that a 4% withdrawal looks to be successful for a retiree, circa 2000.
Now the question I have is what would have been SafeMax for the same time period? Is that knowable? Can it even be estimated?

It can't be known or estimated in any meaningful sense. If you did a monte carlo simulations you'd just be able to say "it'll likely be somewhere between 3.4% and 5.3%". Which isn't really that useful.

SAFEMAX can only be known retrospectively, once all 30 years have passed. With 13 years remaining there are too many unknowns.

First, let's assume that they used a 60/40 portfolio, where half of their equities were in VTSMX (U.S. stocks) and half in VGTSX (international equities), and the bonds were in VBMFX (total U.S. bond market). Let's also assume that their starting portfolio was $1M. Their withdrawals occur at year end (first year withdrawal of $41,355 on 12/31/2000).

Great post.
This reinforces 4 things to me in my particular financial situation (others may be different), that I need to keep in mind going forward.
1. Keep SPIA's on the option table.
2. 25X is not enough, maybe not even close going forward (I don't have a pension or very many alternate income streams).
3. Ability to adjust withdrawals is vital.
4. Explore alternate income streams.

thanks again, great post.
j

** Edited for clarity as it applies to my own situation.

How in the world is 25x not enough? This graph shows the exact opposite. Even using brain-dead following 4% rule to the letter, it still worked.

I agree with points 1 and 3.... maybe 4 (I know you're a real estate guy with rental income). But this thread shows that 25x is indeed a useful "rule of thumb".

Most of us have a lot of discretionary expenses built into our 4%. Most of us would take 2 vacations instead of 4 vacations during a 50% stock market crash or wait an extra year or two to buy a new car.

SPIA is always an option.

Look, you and many others here have 40x or 50x expenses because you weren't even paying attention. You loved your work, or you made a lot of money young that it was no great sacrifice to work an extra 5 years at age 50 to shoot past 25x expenses.

But plenty of people are approaching 25x expenses at a normal retirement age, and there's no reason for them to work an extra 5 years at age 60 or 65 because they've been scared that "4% is not even close".

Time is also a limited resource. No one wants to risk running out of money, but it sure seems a lot of people on these boards are willing to risk running out of time.

You're correct and thanks for pointing it out.
I edited my post to show it applies to my own personal financial situation.

Yes, I have been blessed with a little success in R/E by reinvesting every dime made into my business for 4 decades.(yes, I did not pay attention to anything. . 100+ tenants were overwhelming and pure burnout). Never had a vacation. Rarely took a day off.
I'm planning to take my first ever "vacation" soon.

Had been aware of Investment Finance via Bogleheads perhaps I might have retired sooner, done better, avoided "total burnout" , or had alternative income streams such as a pension, 401k, IRA, or a semblance of a portfolio.

But, lacking those alternate income streams, I'm now have a SPOF, (single point of failure) for the most part, which is my Bogle portfolio. Rentals are now a lesser part of my holdings. For me, this vulnerability is a concern. A financial black swan for me would be a severe Market Downturn and a R/E crash as in the 70/80's. As for 50x, I really did not fully grasp what I had earned and "built up" until I started to sell my holdings because I was always in acquisition mode with rarely very much free cash around.

I'm used to inserting hefty margins of operating safety and mentally did the same with "willthrill81's" excellent post. Thus my post. It may apply only to myself but hopefully it may help others in my position that have the same degree (though possibly extreme) of caution going forward into retirement.

What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that. How would a 4% withdrawal rate work out then? (I wanted to use a number between 90% which has happened and 50% which has been common and likely to happen in the near future)

OK, that would be a nightmare scenario. But what's the alternative? If you just put the money in a safe place like CDs or a fixed annuity, another alternative bleak scenario that is probably equally possible is hyper-inflation that would leave you in similarly bad shape and unable to pay your bills.

There is no free lunch no-risk approach to insure useful income in any tail-risk environment. (At least I can't think of any, other than having so much money that even a minuscule real return would meet your expenses for life.)

Of course, this is the core philosophy behind Bogleheads. Looking for an all-purpose way around an economic depression is just not going to work as far as I can surmise. A 75% crash that doesn't recover anytime soon? That's not really something you can plan for I don't think.

Last edited by rgs92 on Tue Jan 09, 2018 11:24 am, edited 1 time in total.